A Taxing Debate

Tax is much in the news. The recent budget gave us pastygate, the granny grab and tax reductions – for the highest paid. (It also reduced the tax paid by the lower paid, but that isn’t such a great headline and didn’t seem to feature much in the media coverage.) The London mayoral elections contained allegations against Ken Livingstone (apparently unfounded regarding illegality but possibly guilty of hypocrisy), leading to a “confrontation” in a lift and all mayoral candidates publishing their personal tax details. Tax has been one of the main issues in the Republican nomination race.

Either matching the mood of the zeitgeist – or jumping on the bandwagon – the RSA organised a panel discussion to talk about tax – “Should Tax Be More Taxing?“. There were three speakers from different parts of the spectrum, and the focus was very much on corporate – rather than personal – taxes, and multinational corporations at that, a somewhat more specialised area (although also much in the news).

Mike Lewis from ActionAid‘s main point was that large corporations avoiding tax can be significant and material sums for developing nations. Large, multinational organisations can organise their work to minimise the tax they have to pay: if directors believe that it is their duty to maximise shareholder value, it would be their duty to do so. Avoiding (rather than evading) tax is legal – but multinational corporations can afford legions of tax lawyers to help them stretch the law. Lewis proposed international regulations to reduce corporate tax tourism, but clearly different countries should be able to tax businesses what they want (or need)?

Philip Booth of the Institute of Economic Affairs took the opposite extreme, suggesting that the only way to stop corporate tax avoidance is to stop corporate tax: not as mad as it sounds, since the shareholders and other owners of large organisations have to declare income and pay taxes as individuals. However, Mike Lewis highlighted two problems with this

  1. the owners may live in different jurisdiction from where the work is done or the profits made

  2. the owners can hide their ownership (and taxes!) in tax havens and behind nominee accounts – so this transfers the problem

Richard Murphy of the Tax Justice Network spoke most convincingly, pointing out that despite tax being central to politics in western democracies, there was little informed debate about tax itself – candidates may bicker about the details of tax rates or exemptions, but not about tax per se. Murphy calculates that tax evasion costs the UK £70bn per year. (HMRC estimates that evasion and avoidance together account for £35bn lost to the government [PDF] – see Table 1.1.) If Murphy is right, that’s about 10% of the total tax take of approximately £600bn (the figures are for different years and may not be wholly comparable, hence the approximation…!): that’s a significant amount and could reduce the government’s austerity programme by a lot. Corporate tax avoidance is put at estimated to be £12bn a year – still an awful lot of money (but also legal, if not morally right).

Murphy believes that one solution is to make corporate tax more transparent – by getting corporations to disclose the tax they pay and where in their annual accounts – the hope being that customers and investors will exercise pressure to bring corporations into line. What won’t help is the government cutting the resources available to investigate tax avoidance and evasion – HMRC is losing 13,000 staff as a result of government cuts.

The UK tax system is clearly a mess. And it gets messier every year: chancellors can’t help tinkering (Gordon Brown was one of the worst) and the tax legislation apparently runs to 11,000 pages – too much for anyone to remember! The complexity leads to lots exceptions: politicians like to push their pet projects, the aim being to promote particular ends – way back in the early 1990s when I had to learn about tax for some exams, I remember their being an exemption relating to companies who launched satellites, applicable I think to only a handful of companies and presumably designed to promote high tech industries. The tax system is full of anomalies.

The Institute of Fiscal Studies published the Mirrlees Review, recommending wholesale reform of the UK tax system. Amongst their recommendations (taken from the press release [PDF] – I am not sufficiently masochistic to read the whole thing!) are

  • remove the distinction between national insurance and income tax, and the complexities it creates (unlikely to happen because pensioners are subject to IT but not NI – though tweeking age-related allowances [and hence adding more complication] may be a way around this)

  • drastic reform of the benefits system (and the perverse incentives it can produce – thoughthe government is hoping to tackle those anyway)
  • extend VAT (not a vote winner, especially after pastygate!)
  • reform property taxes
  • align tax on employment, self-employment and corporate taxes (this would remove the incentive for individuals to use companies to account for their income, as Ken Livingstone and many others do)
  • equalise the tax treatment of corporate debt and equity (this might stop companies over-leveraging, possibly one of the many causes of the financial crisis)

Others call for more radical changes – a flat tax rate, for instance, or moving to a consumption tax (neither would work politically, being highly regressive, despite possibly making economic sense).

Clearly something radical should be done, to simplify the tax system, reduce opportunities for avoidance and promote an equitable society. But agreeing what – maybe even agreeing what the objectives if taxation are – seems very unlikely.

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